FINANCIAL Highlights                       May 31, (in thousands, except per share information) 2007  2006  2005  2004  2003  Revenues $125,251  $114,806  $107,616  $94,110  $108,796  Costs of revenues and depreciation  55,848   49,350   45,862   44,778   62,663 Selling, general and administrative expenses  40,392   33,755   29,869   32,207   37,399 Loss on impairments of goodwill and intangibles  —   —   —   —   37,135 Interest and other, net  (5,440)  (2,705)  (3,234)  (1,335)  (4,091) Income (loss) before income taxes  34,451   34,406   35,119   18,460   (24,310)Income tax provision (benefit)  13,402   12,222   10,854   6,476   (9,324) Net income (loss) $21,049  $22,184  $24,265  $11,984  $(14,986) Earnings (loss) per share:                    Basic $0.82  $0.87  $0.97  $0.48  $(0.60)Diluted $0.81  $0.86  $0.96  $0.48  $(0.60)Shares used in per share calculation:                    Basic  25,716   25,359   24,978   24,860   24,810 Diluted  26,053   25,762   25,369   25,034   24,810 Total assets $284,819  $260,936  $234,847  $207,695  $278,787 Shareholders’ equity $243,479  $221,841  $195,017  $168,616  $254,014 Shareholders’ equity per common share $9.43  $8.68  $7.77  $6.77  $10.23 Cash dividends declared per common share $0.10  $—  $—  $4.00  $— 

 
PAGE 10       ELECTRO RENT 2007 ANNUAL REPORT**MANAGEMENT’S Discussion and Analysis of Financial Condition and Results of Operations**The following discussion of our financial condition and results of operations should beread in conjunction with the fiscal 2007 Consolidated Financial Statements and the notesthereto and the other financial and statistical information appearing elsewhere in thisannual report.**OVERVIEW**We generate revenues through the rental, lease and sale of electronic equipment, primarily testand measurement (“T&M”) and personal computer-related data products (“DP”) equipment. In fiscal2007, 77% of our rental and lease revenues were derived from T&M equipment. This percentagedecreased from the prior year period as a result of the acquisition of Rush Computer Rentals, Inc.(“Rush”) on January 31, 2006, and its on-going DP revenues. Excluding the effect of the Rushacquisition, DP revenues have stabilized over the last three fiscal years, while our T&M businessgrew due to T&M activity in telecommunications, aerospace and defense markets.In fiscal 2007, rental revenues comprised 82% of our rental and lease revenue. That percentage hasbeen increasing over the last three years due to an increase in T&M rental activity that began infiscal 2005 and the Rush acquisition in fiscal 2006.A significant part of our T&M equipment portfolio is rented or leased to large companies in theaerospace, defense, electronics and telecommunications industries. We believe that a large part ofour T&M equipment is used in research and development activities. We also rent equipment tocompanies of various sizes representing a cross-section of industry. Our business is relativelynon-seasonal except for the third quarter months of December, January and February, when rentalactivity declines due to extended holiday closings by a number of customers. In addition, becauseFebruary is a short month, rental billing is reduced.The profitability of our business depends in part on controlling the timing, pricing and mix ofpurchases and sales of equipment. We seek to acquire new and used equipment at attractive pricesfor the purpose of deriving a profit from a combination of renting and/or selling such equipment.The sale of equipment, either after acquisition or after it has been rented, can comprise asignificant portion of our revenues and operating profit. To maximize our overall profit from therental, leasing, and sales of equipment, we manage our equipment pool on an on-going basis byanalyzing our product strategy for each specific equipment class in light of that equipment’shistorical and projected life cycle. In doing so, we must compare our estimate of potential profitfrom rental with the potential profit from the product’s immediate sale and replacement with new orother equipment. In our analysis, we assume depreciation and impairment of equipment based onprojected performance and historical levels, although historical trends are not necessarilyindicative of future trends. Our overall equipment management is complex, and our product strategycan change during a product’s lifetime based upon numerous factors, including the U.S. and globaleconomy, interest rates and new product launches. Our strategic equipment decisions are generallybased on the following fundamentals:§ Our acquisition cost; § Our estimates of current and future market demand for rentals; § Our estimates of current and future supply of product; § The book value of the product after depreciation and other impairment; § Our estimates of the effect of interest rates on rental and leasing fees as well as capital financing; and § Our estimates of the potential current and future sale prices.If we do not accurately predict market trends, or if demand for the equipment we supplydeclines, we can be left with inventory that we are unable to rent or sell for a profit. We assessthe carrying value of the equipment pool on a quarterly basis or when factors indicating impairmentare present.When the U.S. and global economy began to rebound in fiscal 2004, we saw increased demand for ourequipment, and were able to sell equipment that was older and more fully depreciated. Due in partto these events, we experienced greater than normal gross margin on equipment sales of 53% forfiscal 2005 and 46% for fiscal 2006. Furthermore, due to strong demand for T&M equipment, our grossmargin on sales in fiscal 2007 was 47%. Based on our current equipment management strategy, webelieve that gross margin on sales will return to normal historical levels of
 

 
ELECTRO RENT 2007 ANNUAL REPORT       PAGE 1140% to 45% as older and previously impaired equipment constitute a smaller percentage of sales,although this percentage will fluctuate on a quarterly basis.Results for future quarters, however, are subject to unanticipated events, as in the case ofunusual opportunities for sales and early termination of equipment leases. Revenues from earlytermination of equipment leases are included in sales of equipment and other revenues. Such earlyterminations can (i) result in sales proceeds to the extent that the customer decides to purchasethe equipment involved, (ii) accelerate lease payments to the extent of lease termination fees,and/or (iii) increase the pool of equipment available for lease by us to the extent the customerdoes not purchase the equipment, which would adversely affect future utilization unless we canrent, lease or sell that equipment to another party.**PROFITABILITY AND KEY BUSINESS TRENDS**Comparing fiscal 2007 to fiscal 2006, our revenues rose by 9.1% to $125.3 million, ouroperating profit declined by 8.5% to $29.0 million and our net income declined by 5.1% to $21.0million. Our revenue growth included growth in our base business as well as additional revenuesfrom our strategic initiatives: the acquisition of Rush, as well as growth in our new internationalmarkets in China and Europe. T&M rental and lease activity for fiscal 2007 increased compared tofiscal 2006, reflecting the strengthening global economy, gains in the aerospace/defense,semiconductor manufacturing and telecommunications manufacturing segments, and growth in ourforeign operations. Our DP rental and lease activity for the same period also increased, reflectingthe acquisition of Rush.Some of our key profitability measurements are presented below:               Fiscal 2007  Fiscal 2006  Fiscal 2005  Net income per diluted common share (EPS) $0.81  $0.86  $0.96 Net income as a percentage of average assets  7.7%  8.9%  10.4%Net income as a percentage of average equity  9.2%  10.7%  12.7% The decline in operating profit for fiscal 2007 compared to fiscal 2006 reflects the cost ofour strategic growth initiatives, higher depreciation expense related to a larger and newerequipment pool and the Rush acquisition, stock compensation expense of $0.9 million due to theadoption of Statement of Financial Accounting Standards No. 123R (revised 2004), *Share-BasedPayment*(“SFAS 123R”), in fiscal 2007, and an equipment impairment charge of $0.4 million. Fiscal2006 benefited from reductions in the accrued liability for income taxes of $1.0 million due to theexpiration of specific risks related to closed tax audit years. We have implemented certainprograms associated with improving the profitability of the Rush acquisition and our foreignoperations that we believe will allow us to improve the operating results of these businesses infuture periods.The amount of our equipment on rent, based on acquisition cost, increased to $142.9 million at May31, 2007 from $119.5 million at May 31, 2006. Acquisition cost of equipment on lease increased to$42.0 million at May 31, 2007 from $41.7 million at May 31, 2006. Utilization for our T&M equipmentpool, based on acquisition cost of equipment on rent compared to the total pool, was 66.5% at May31, 2007 compared to 65.8% at May 31, 2006, primarily due to strengthening demand. Over the sameperiod, utilization of our DP equipment pool decreased to 58.0% from 59.9%.During the same fiscal year periods, average monthly rental rates as a percent of acquisition costfor T&M and DP decreased 3.4% and 7.2%, respectively, as a result of increased competition, whileaverage monthly T&M lease rates as a percent of acquisition cost were comparable, and DP leaserates increased by 5.5%. In the third quarter of fiscal 2007, we recorded a non-cash equipmentimpairment charge of $0.4 million resulting from low projected demand for certain rental products,including general purpose and communications equipment.**STRATEGIC GROWTH PLANS**In recent periods, we have seen some recovery of our business from its significant contractionduring the early part of this decade. Although we reduced our expenses to maintain profitabilityduring the contraction, we believe that our resources and financial infrastructure in the U.S.remain capable of handling a significantly greater volume of business activity without aproportionate increase in expenses. Based on this belief and our assessment of the improving
 

 
PAGE 12       ELECTRO RENT 2007 ANNUAL REPORTclimate in recent periods, we have been seeking ways to increase revenues to leveragethat infrastructure. These strategies include:**Internal Growth Strategies:**We intend to continue internal growth by building upon our vendorand customer relationships and expanding the types of services and equipment we provide. Thus, forexample,§ We have entered into distribution agreements with three leading manufacturers for arange of basic T&M equipment. § We have re-focused our DP marketing approach to emphasize short-term, event-orientedrentals in addition to our traditional markets. § We have been marketing a flexible leasing program that allows customers to build equitythat can be applied against the future purchase of the test equipment. § We have implemented an expanded customer communication program to identify usedequipment re-marketing opportunities.**Acquisition Growth Strategies:**We are also seeking to grow through acquisitions.Acquisitions can permit us to rapidly add revenues, as well as to expand into new geographicalareas and/or markets. On January 31, 2006, we completed the acquisition of Rush, a privatecompany with annual revenue of approximately $10 million from the rental and sale of a widerange of personal computers and related equipment to customers located primarily in thenortheastern United States.**Geographic Expansion Strategies:**Prior to fiscal 2006, our activity was largely limited to NorthAmerica, except for some limited rentals to North American companies operating in othergeographical areas. We intend to exploit opportunities for expanding our rental and leasingservices globally. As part of that strategy, in fiscal 2006 we entered two of the largest worldmarkets: Europe and China.§ Our wholly owned subsidiary in Tianjin, China, commenced operations in June 2005after we received what we believe to be one of the first licenses for a wholly foreign-ownedequipment rental business in China. § In September 2005, we acquired a small T&M equipment rental company based in Belgium, fromwhich we service the European market.Of course, none of these growth strategies may be successful, and each entails risks that couldimpact our continuing business results. In addition to the risks associated with our coreoperations, there are special risks associated with international operations and with acquisitions,as well as with growth in general. For a more detailed summary of some of the risks associated withthese and other factors, please see the Risk Factors discussed in Item 1A of our 2007 Annual Reporton Form 10-K.**CRITICAL ACCOUNTING POLICIES AND ESTIMATES**The preparation of consolidated financial statements in conformity with accounting principlesgenerally accepted in the United States of America (“generally accepted accounting principles”)requires us to make estimates and assumptions that affect the reported amounts of assets andliabilities and the disclosure of contingent assets and liabilities at the date of the financialstatements and the reported amounts of revenues and expenses during the reporting period. On aregular basis, we review these estimates including those related to asset lives and depreciationmethods, impairment of long-lived assets including rental and lease equipment, allowance fordoubtful accounts and income taxes. These estimates are based on our historical experience and onvarious other assumptions believed to be reasonable under the circumstances. Actual results maydiffer from these estimates under different assumptions or conditions. We believe, however, thatthe estimates, including those for the above-listed items, are reasonable.We believe the following critical accounting policies affect the more significant judgments andestimates used in the preparation of our financial statements:**AssetLives and Depreciation Methods:** Our primary business involves the purchase and subsequentrental and lease of long-lived electronic equipment. We have chosen asset lives that we believecorrespond to the economic lives of the related assets. We have chosen depreciation methods that webelieve match our benefit from the assets with the associated costs. These judgments have been madebased on our expertise in each equipment type that we carry. If the asset life and depreciationmethod chosen do not reduce the book value of the asset to at least our potential future cash flowsfrom the asset, we would be required to record an impairment loss. Depreciation methods and usefullives are periodically reviewed and revised as deemed appropriate.
 

 
ELECTRO RENT 2007 ANNUAL REPORT       PAGE 13**Impairment of Long-Lived Assets:**On a quarterly basis, we review the carrying value of ourrental and lease equipment to determine if the carrying value of the assets may not be recoverabledue to current and forecasted economic conditions. This requires us to make estimates related tofuture cash flows from the assets and to determine whether any deterioration is other thantemporary. If these estimates or the related assumptions change in the future, we may be requiredto record additional impairment charges. In the third quarter of fiscal 2007 and fourth quarter offiscal 2005, we recorded non-cash impairment charges of $0.4 million and $0.6 million,respectively, resulting from low projected demand for certain rental products, including generalpurpose and communications test equipment. No similar impairment charge was recorded in fiscal2006.**Allowance for Doubtful Accounts:**We maintain an allowance for doubtful accounts for estimatedlosses resulting from the inability of customers to pay our invoices. The estimated losses arebased on historical collection experience in conjunction with an evaluation of the current statusof the existing accounts. If the financial condition of our customers were to deteriorate,additional allowances could be required that would reduce income. Conversely, if the financialcondition of our customers were to improve or if legal remedies to collect past due amounts weremore successful than expected, the allowance for doubtful accounts may need to be reduced andincome would be increased.**IncomeTaxes:** As part of the process of preparing our consolidated financial statements, we arerequired to estimate income taxes in each of the jurisdictions in which we operate. Significantjudgment is required in determining the provision for income taxes and deferred tax assets andliabilities. This process involves us estimating actual current tax exposure together withassessing temporary differences resulting from differing treatment of items, such as depreciationand amortization, for tax and accounting purposes. These differences result in deferred tax assetsand liabilities, which are included within our consolidated balance sheet. We then assess thelikelihood that our deferred tax assets will be recovered. To the extent management believes thatrecovery is not likely, we establish a valuation allowance. We determined that a valuationallowance was required in fiscal 2007 and fiscal 2006 of $0.2 million and $0.2 million,respectively, for our deferred tax asset related to certain foreign net operating loss carryforwards. There was no valuation allowance for fiscal 2005.**FISCAL 2007 COMPARED WITH FISCAL 2006****Total Revenues:**Total revenues for fiscal 2007 rose $10.5 million, or 9.1%, to $125.3million, compared to $114.8 million in the same period in the prior year. The increase in totalrevenues was due to a 13.8% increase in rental and lease revenues, which was offset by an 8.6%decrease in sales of equipment and other revenues.Rental and lease revenues in fiscal 2007 were $103.1 million, compared to $90.5 million in theprior year. This increase reflects higher demand for T&M equipment in our major market segments,which we believe stems from the general economic expansion, as well as our expansion into China andEurope, and the full year effect of the Rush acquisition in late fiscal 2006. The effect of higherdemand for T&M equipment was partially offset by lower rental rates in fiscal 2007 related toincreased competition.Sales of equipment and other revenues decreased to $22.2 million in fiscal 2007 from $24.3 millionin fiscal 2006. Gross margin on sales decreased to $8.9 million in fiscal 2007 as compared to $9.5million in the prior year, while the gross margin percentage increased to 47.3% for fiscal 2007from 46.4% for fiscal 2006. The lower margin in the prior year reflected a large buyout of a leaseby a customer.**Depreciation of Rental and Lease Equipment:**Depreciation of rental and lease equipment in fiscal2007 increased to $42.2 million, or 40.9% of rental and lease revenues, from $35.8 million, or39.5% of rental and lease revenues, in fiscal 2006. The increased depreciation expense in fiscal2007 reflects higher expenditures for rental and lease equipment, the full year effect of the Rushacquisition and an equipment impairment charge of $0.4 million, while the increased depreciationratio is due primarily to lower rental rates in the current year.**Costs of Revenues Other Than Depreciation:**Costs of revenues other than depreciation in fiscal2007 increased 0.7% to $13.7 million from $13.6 million in fiscal 2006. Costs of revenues otherthan depreciation primarily includes the cost of equipment sales, which decreased as a percentageof equipment sales to 52.7% in fiscal 2007 from 53.6% in fiscal 2006. As noted above, we expectthat this number will fluctuate quarter-to-quarter depending primarily on customer requirements andfunding, and increase over time to the historical range of 55% to 60%.**Selling, General and Administrative Expenses:**Selling, general and administrative expensesincreased 19.7% to $40.4 million in fiscal 2007, as compared to $33.8 million in fiscal 2006. Thisincrease primarily reflects the full year
 

 
PAGE 14       ELECTRO RENT 2007 ANNUAL REPORTeffect and additional operating costs related to the Rush acquisition and development of our newoperations in China and Europe. SG&A expenses also include $0.9 million of stock compensationexpense for fiscal 2007 as a result of the adoption of SFAS 123R in fiscal 2007; there was nocomparable expense during the prior year. SG&A expenses as a percentage of total revenues increasedto 32.2% in fiscal 2007 from 29.4% in fiscal 2006.**Operating Profit:**As a result of the changes in revenues and operating expenses discussedabove, operating profit was $29.0 million or 23.2% of total revenues in fiscal 2007 compared to anoperating profit of $31.7 million or 27.6% of total revenues in fiscal 2006.**Interest Income, Net:**Net interest income was $3.9 million for fiscal 2007 compared to $2.7million in the prior fiscal year. This increase primarily reflects increases in prevailingmoney-market interest rates.**Income from Settlements:**In the third quarter of fiscal 2007, when all contingencies expired, werecognized $1.6 million in other income relating to proceeds received from a class action lawsuit. There wasno comparable income in fiscal 2006.**Income Tax Provision:**Our effective tax rate was 38.9% for fiscal 2007, compared to 35.5% forfiscal 2006. The increase primarily reflects prior year reductions in the accrued liability forincome taxes of $1.0 million due to the expiration of specific risks related to closed tax audityears. Additionally, in fiscal 2007 there was a decline in tax advantaged investments andextraterritorial income exclusions of $0.6 million. Finally, a portion of our stock compensationexpense for fiscal 2007 related to incentive stock options does not give rise to a tax benefit.**FISCAL 2006 COMPARED WITH FISCAL 2005****Total Revenues:**Total revenues for fiscal 2006 increased $7.2 million, or 6.7%, to $114.8million compared to $107.6 million in the prior year. The increase in total revenues was due to a12.8% increase in rental and lease revenue offset by an 11.3% decrease in sales of equipment andother revenues.Rental and lease revenues in fiscal 2006 were $90.5 million compared to $80.3 million in the prioryear. This increase reflects higher demand and rental rates for T&M and DP equipment in our majormarket segments, which we believe stems from the general economic expansion, as well as ourinternational expansion into China and Europe, and the Rush acquisition during fiscal 2006.Sales of equipment and other revenues decreased to $24.3 million in fiscal 2006, from $27.4 millionin fiscal 2005. Fiscal 2005 benefited from several large non-recurring items, including an earlylease termination and two buyouts, totaling $3.7 million. Gross margin on sales in fiscal 2006decreased to $9.5 million from $11.0 million in fiscal 2005, while the gross margin percentagedecreased to 46.4% from 52.6%. The declines in gross margin and gross margin percentage reflect twolarge non-recurring buyout transactions with high gross margins in fiscal 2005. The decline ingross margin percentage on sales in fiscal 2006 also reflects a return to historic levels, as olderand previously impaired equipment constitute a smaller percentage of equipment sold than during thelast two years.**Depreciation of Rental and Lease Equipment:**Depreciation of rental and lease equipment in fiscal2006 increased to $35.8 million, or 39.5% of rental and lease revenues, from $33.4 million, or41.6% of rental and lease revenues, in fiscal 2005. The increased depreciation expense reflectshigher expenditures for rental and lease equipment during fiscal 2005 and fiscal 2006, while thelower ratio reflects higher equipment utilization and rental rates in fiscal 2006.**Costs of Revenues Other Than Depreciation:**Costs of revenues other than depreciation in fiscal2006 increased 8.8% to $13.6 million from $12.5 million in fiscal 2005. Costs of revenues otherthan depreciation primarily includes the cost of equipment sales, which increased to 53.6% ofequipment sales in fiscal 2006 from 47.4% of equipment sales in fiscal 2005. The increase in thispercentage reflects the prior year customer buyout transactions described above and also reflectsthe expected return to historical levels from lower cost ratios in the previous year, as older andpreviously impaired equipment constitute a smaller percentage of equipment sold.**Selling, General and Administrative Expenses:**Selling, general and administrative expensesincreased 13.0% to $33.8 million in fiscal 2006 as compared to $29.9 million in fiscal 2005. Thisincrease primarily reflects the Rush acquisition, an overall increase in business activity andcertain expenses associated with the development of our new operations in China and Europe. SG&Aexpenses as a percentage of total revenues increased to 29.4% in fiscal 2006 from 27.8% in fiscal2005.
 

 
ELECTRO RENT 2007 ANNUAL REPORT       PAGE 15**Operating Profit:**As a result of the changes in revenues and operating expenses discussed above,our operating profit was $31.7 million or 27.6% of total revenues in fiscal 2006 compared to anoperating profit of $31.9 million or 29.6% of total revenues in fiscal 2005.**Income from Settlements:**In the first quarter of fiscal 2005, when all contingenciesexpired, we recognized $1.8 million in other income relating to proceeds received from aclass action lawsuit. There was no comparable income in fiscal 2006.**Interest Income, Net:**Net interest and investment income of $2.7 million for fiscal 2006 wasabout twice the $1.5 million recorded in fiscal 2005. This primarily reflects increases inprevailing money-market interest rates and to a lesser degree increased cash balances.**Income Tax Provision:**Our effective tax rate was 35.5% in fiscal 2006, compared to 30.9% infiscal 2005. Fiscal years 2006 and 2005 include reductions in the accrued liability for incometaxes of $1.0 million and $2.5 million, respectively, reflecting the expiration of specific risksrelated to closed tax audit years.**LIQUIDITY AND CAPITAL RESOURCES**During the last three fiscal years, our primary capital requirements have been purchases ofrental and lease equipment. We generally purchase equipment throughout each year to replaceequipment that has been sold and to maintain adequate levels of rental equipment to meet existingand expected customer demands. To meet increasing T&M rental demand, support areas of potentialgrowth for both T&M and DP equipment and to keep our equipment pool technologically up-to-date, wemade payments for the purchase of $74.9 million of rental and lease equipment during fiscal 2007,$61.4 million in fiscal 2006, and $72.1 million in fiscal 2005.In addition to increasing our rental equipment, we have in the past purchased shares of our commonstock under an authorization from our Board of Directors. Shares repurchased by us are retired andreturned to the status of authorized but unissued stock. During the fiscal year ended May 31, 2007,we purchased 224,600 shares of our common stock for $3.0 million, at an average price of $13.19 pershare. As of May 31, 2007, 957,000 shares of our common stock remain authorized for repurchase.**RepurchaseSummary**                   Year Ended May 31,   Three Year (in thousands, except per share information) 2007  2006  2005  Totals  Shares repurchased  225   —   —   225 Average price per share $13.19  $—  $—  $13.19 Aggregate purchase price $2,962  $—  $—  $2,962 Total cash returned to shareholders $2,962  $—  $—  $2,962  In April 2007, our board of directors authorized a regular quarterly cash dividend of $0.10 percommon share, with the first such dividend payable July 10, 2007.For the past three fiscal years, the total of our cash, cash equivalents and marketable securitieshas remained relatively stable. We expect that the level of these liquid assets may decrease as wepay dividends in future quarters, or decide to buy back additional shares of our common stock,increase equipment purchases in response to demand, finance another acquisition, or pursue otheropportunities. We have invested our cash balance in money market funds and other instruments withmaturities of less than 90 days.The acquisition cost of our rental and lease equipment portfolio at May 31, 2007 totaled $302.0million, increasing $39.6 million from the prior year. During the three years ended May 31, 2007,we made payments for equipment purchases totaling $208.4 million, and recorded an aggregateincrease in the acquisition cost of our equipment portfolio, net of the liquidation of usedequipment, of $62.2 million. We have three principal sources of liquidity: cash flows provided byour operating activities, proceeds from the sale of equipment from our portfolio, and externalfunds that historically have been provided by bank borrowings.
 

 
PAGE 16      ELECTRO RENT 2007 ANNUAL REPORTDuring fiscal 2007, 2006 and 2005, net cash provided by operating activities was $53.8million, $47.7 million, and $48.7 million, respectively. This increase is largely the result ofhigher depreciation and amortization in fiscal 2007 as compared to fiscal 2006 and 2005.During fiscal 2007, 2006 and 2005, net cash used in investing activities was $57.7 million, $24.7million and $48.0 million, respectively. Fiscal 2007 includes $74.9 million related to payments forthe purchase of rental and lease equipment, compared to $61.4 million and $72.1 million for fiscal2006 and 2005, respectively. Fiscal 2006 included $26.6 million for the redemption of marketablesecurities compared to redemptions of $21.2 million for fiscal 2005, offset by $17.6 million forpurchases of marketable securities in fiscal 2005. Fiscal 2006 included $9.4 million in cash paidfor the Rush acquisition, net of acquired cash.Net cash flows from financing activities were $2.3 million, $3.7 million and $1.7 million fiscal2007, 2006 and 2005, respectively. Proceeds from issuance of common stock were $4.3 million, $3.8million and $1.7 million, respectively, for fiscal 2007, 2006 and 2005. Fiscal 2007 includes therepurchase of $3.0 million of our common stock, offset by $0.9 million of tax benefit for stockoptions exercised. The fiscal 2006 and 2005 tax benefit for stock options exercised was included innet cash provided by operating activities.As the following table illustrates, aggregate cash flows from operating activities and proceedsfrom the sale of equipment have been more than sufficient to fund our operations during the lastthree fiscal years.                   Three Years Ended          (in thousands) May 31, 2007   2007  2006  2005  Cash flows fromoperatingactivities1 $150,163  $53,768  $47,743  $48,652 Proceedsfrom sale of equipment  60,242   18,786   20,512   20,944  Total  210,405   72,554   68,255   69,596 Payments for equipmentpurchases  (208,375)  (74,894)  (61,352)  (72,129)Net increase inequipment portfolio atacquisition cost  62,221   39,649   6,353   16,219   1 For the components of cash flows from operating activities see the Consolidated Statements of Cash Flows.As indicated by the table, cash flows from operating activities and proceeds from sale ofequipment provided 101% of the funds required for equipment purchased during the three-year periodended May 31, 2007. We believe that cash and cash equivalents, marketable securities, cash flowsfrom operating activities, proceeds from the sale of equipment and our borrowing capacity will besufficient to fund our operations for at least the next twelve months.We have a $10.0 million revolving line of credit with an institutional lender, subject to certainrestrictions, to meet equipment acquisition needs as well as working capital and general corporaterequirements. We had no bank borrowings outstanding or off balance sheet financing arrangements atMay 31, 2007.We lease certain facilities under various operating leases. Most of the lease agreementsprovide us with the option of renewing the lease at the end of the initial lease term, at thefair rental value, for periods of up to five years. In most cases, we expect that facilityleases will be renewed or replaced by other leases in the normal course of business.Inflation generally has favorably influenced our results of operations by enhancing the sale pricesof our used equipment. However, lower inflation rates and the continued availability of newer, lessexpensive equipment with similar or better specifications over a period of several years couldresult in lower relative sale prices for used electronic equipment. If this should occur, ourmargins and earnings will be reduced. Prices of new and used electronic test equipment have notconsistently followed the overall inflation rate, while prices of new and used personal computersand servers have consistently declined. Because we are unable to predict the advances in technologyand the rate of inflation for the next several years, it is not possible to estimate the impact ofthese factors on our margins and earnings.
 

 
ELECTRO RENT 2007 ANNUAL REPORT       PAGE 17**CONTRACTUAL OBLIGATIONS**The table below presents the amount of payments due under our contractual obligations. Thetable reflects expected payments due as of May 31, 2007 and does not reflect changes that couldarise after that time.                       Payments due by period       Less than          More than  Contractual Obligations (in thousands) Total  1 year  1-3 years  3-5 years  5 years   Facility lease payments, not including propertytaxes and insurance $2,130  $744  $1,233  $130  $23 Employment agreements  20   20   —   —   — Retention agreements  215   215   —   —   —  Total $2,365  $979  $1,233  $130  $23  **SPECIAL NOTE ABOUT FORWARD-LOOKING STATEMENTS**This Report contains forward-looking statements within the meaning of Section 27A of theSecurities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, asamended. You can find many (but not all) of these statements by looking for words such as“approximates,” “believes,” “expects,” “anticipates,” “estimates,” “intends,” “plans,” “would,”“may” or other similar expressions in this Report. We claim the protection of the safe harborcontained in the Private Securities Litigation Reform Act of 1995. We caution investors that anyforward-looking statements presented in this Report, or those which we may make orally or inwriting from time to time, are based on the beliefs of, assumptions made by, and informationcurrently available to us. Such statements are based on assumptions and the actual outcome will beaffected by known and unknown risks, trends, uncertainties and factors that are beyond our controlor ability to predict. Although we believe that our assumptions are reasonable, they are notguarantees of future performance and some will inevitably prove to be incorrect. As a result, ouractual future results can be expected to differ from our expectations, and those differences may bematerial. Accordingly, investors should use caution in relying on past forward-looking statements,which are based on known results and trends at the time they are made, to anticipate future resultsor trends.Some of the risks and uncertainties that may cause our actual results, performance or achievementsto differ materially from those expressed or implied by forward-looking statements include thefollowing: common stock price fluctuations, fluctuations in operating results, risks associatedwith technology changes, risks associated with customer solvency, competition, risks associatedwith international operations, risks associated with our manufacturers and suppliers, dependence onkey personnel, control by management and others, risks associated with possible acquisitions andnew business ventures, risks associated with fluctuating interest rates and anti-takeoverprovisions. For further discussion of these and other factors, see the sections contained in thisAnnual Report entitled “Management’s Discussion and Analysis of Financial Condition and Results ofOperations”; Item 1A “Risk Factors” and Item 7A “Quantitative and Qualitative Disclosure AboutInterest Rates and Currency Rates,” in our 2007 Annual Report on Form 10-K; our Proxy Statement forour 2007 Annual Meeting of Shareholders; and our other filings with the Securities and ExchangeCommission.This Report and all subsequent written and oral forward-looking statements attributable to us orany person acting on our behalf are expressly qualified in their entirety by the cautionarystatements contained or referred to in this section. We do not undertake any obligation to releasepublicly any revisions to our forward-looking statements to reflect events or circumstances afterthe date of this Report.
 

 
PAGE 18       ELECTRO RENT 2007 ANNUAL REPORT**CONSOLIDATED Statements of Operations**              Year ended May 31,          (in thousands, except per share information) 2007   2006  2005     **REVENUES:**             Rentals and leases $103,083   $90,548  $80,257 Sales of equipment and other revenues  22,168    24,258   27,359     Total revenues  125,251    114,806   107,616     **OPERATING EXPENSES:**             Depreciation of rental and lease equipment  42,174    35,776   33,365 Costs of revenues other than depreciation of rental andlease equipment  13,674    13,574   12,497 Selling, general and administrative expenses  40,392    33,755   29,869     Total operating expenses  96,240    83,105   75,731     Operating profit  29,011    31,701   31,885 Interest income, net  3,869    2,705   1,476 Income from settlements  1,571    —   1,758     Income before income taxes  34,451    34,406   35,119 Income tax provision  13,402    12,222   10,854     Net income $21,049   $22,184  $24,265     Earnings per share:             Basic $0.82   $0.87  $0.97 Diluted $0.81   $0.86  $0.96 Shares used in per share calculation:             Basic  25,716    25,359   24,978 Diluted  26,053    25,762   25,369     The accompanying notes are an integral part of these consolidated financial statements.
 

 
ELECTRO RENT 2007 ANNUAL REPORT      PAGE 19**CONSOLIDATED Balance Sheets**          As of May 31,       (in thousands, except share information) 2007   2006     **ASSETS**         Cash and cash equivalents $57,172   $58,748 Marketable securities  23,550    22,750 Accounts receivable, net of allowancefor doubtful accounts of $251 and $681  17,161    15,255 Rental and lease equipment, net of accumulated depreciation of$140,164 and $122,213  161,806    140,108 Otherproperty, net of accumulated depreciation and amortization of $13,761 and $12,773  14,990    15,528 Goodwill  2,859    2,083 Intangibles, net of amortization of $904 and $294  1,571    2,127 Other  5,710    4,337       $284,819   $260,936               **LIABILITIES AND SHAREHOLDERS’ EQUITY**         Liabilities:         Accounts payable $10,084   $11,344 Accrued expenses  11,019    8,595 Deferred revenue  5,047    4,557 Deferred tax liability  15,190    14,599     Total liabilities  41,340    39,095     Commitments and contingencies (Note 11)         Shareholders’ equity:         Preferred stock, $1 par — sharesauthorized 1,000,000; none issued         Common stock, no par — sharesauthorized 40,000,000; issued andoutstanding 2007 — 25,812,943;2006 — 25,546,719  32,212    26,351 Retained earnings  211,267    195,490     Total shareholders’ equity  243,479    221,841       $284,819   $260,936     The accompanying notes are an integral part of these consolidated financial statements.
 

 
PAGE 20     ELECTRO RENT 2007 ANNUAL REPORT**CONSOLIDATED**Statements of Shareholders’ Equity               Common Stock   Three years ended May 31, 2007 Number      Retained (in thousands) of Shares  Amount  Earnings  Balance, June 1, 2004  24,898  $19,502  $149,114 Exercise of stock options  203   1,668   — Tax benefit for stock options exercised  —   468   — Net incomefor the year ended May 31, 2005  —   —   24,265               Balance, May 31, 2005  25,101   21,638   173,379 Exercise of stock options  453   3,816   — Tax benefit for stock options exercised  —   907   — Repurchase of common stock  (7)  (10)  (73)Net incomefor the year ended May 31, 2006  —   —   22,184               Balance, May 31, 2006  25,547   26,351   195,490 Exercise of stock options  491   4,339   — Tax benefit for stock options exercised  —   942   — Non-cash stock compensation  —   850   — Repurchase of common stock  (225)  (270)  (2,692)Dividends declared of $0.10 per share  —   —   (2,580)Net incomefor the year ended May 31, 2007  —   —   21,049               Balance, May 31, 2007  25,813  $32,212  $211,267  The accompanying notes are an integral part of these consolidated financial statements.
 

 
ELECTRO RENT 2007 ANNUAL REPORT     PAGE 21**CONSOLIDATED Statements of Cash Flows**              Year ended May 31,          (in thousands) 2007   2006  2005     **CASH FLOWS FROM OPERATING ACTIVITIES:**             Net income $21,049   $22,184  $24,265 Adjustments to reconcile net income to net cash providedby operating activities:             Depreciation and amortization  43,381    36,956   33,631 Gain on sale of rental and lease equipment  (8,891)   (9,526)  (11,018)Impairment loss on rental equipment  440    —   601 Deferred tax liability  591    947   4,760 Income from settlements  —    —   (1,758)Stock compensation expense  850    —   — (Recapture) provision for losses on accounts receivable  (231)   46   (141)Tax benefit for stock options exercised  —    907   468 Excess tax benefit for stock options exercised  (942)   —   — Changes in operating assets and liabilities:             Accounts receivable  (1,674)   (1,666)  (2,608)Other assets  (1,373)   (986)  318 Accounts payable  (707)   25   (191)Accrued expenses  785    (1,307)  (542)Deferred revenue  490    163   867     Net cash provided by operating activities  53,768    47,743   48,652                   **CASH FLOWS FROM INVESTING ACTIVITIES:**             Proceeds from sale of rental and lease equipment  18,786    20,512   20,944 Cash paid for acquisition, net of cash acquired  (257)   (9,404)  — Payments for purchase of rental and lease equipment  (74,894)   (61,352)  (72,129)Purchases of marketable securities  (800)   (550)  (17,550)Redemptions of marketable securities  —    26,600   21,225 Payments for purchase of other property  (498)   (531)  (505)    Net cash used in investing activities  (57,663)   (24,725)  (48,015)                  **CASH FLOWS FROM FINANCING ACTIVITIES:**             Excess tax benefit for stock options exercised  942    —   — Proceeds from issuance of common stock  4,339    3,816   1,668 Payment for repurchase of common stock  (2,962)   (83)  —     Net cash provided by financing activities  2,319    3,733   1,668     Net (decrease) increase in cash and cash equivalents  (1,576)   26,751   2,305 Cash and cash equivalents at beginning of year  58,748    31,997   29,692     Cash and cash equivalents at end of year $57,172   $58,748  $31,997     The accompanying notes are an integral part of these consolidated financial statements.
 

 
PAGE 22     ELECTRO RENT 2007 ANNUAL REPORT**NOTES TO Consolidated Financial Statements**For the years ended May 31, 2007, 2006, and 2005